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Market’s Health Update: Escape Velocity Reached!

  • Written by Syndicated Publisher No Comments Comments
    September 9, 2013

    The market reached intermediate-term oversold conditions this week and investor sentiment has turned bearish to levels that have marked intermediate lows over the past few years. Also, it appears that we may have achieved escape velocity this week as more than 15% of the entire S&P 500 has seen a daily MACD buy signal over the last ten days. That said, given all of the big uncertainty ahead of us (Syria, FOMC September meeting, Fed Chairman nomination, and debt ceiling), things can easily turn on a dime in either direction and we may need some macro clarity before the market gains any meaningful traction.

    S&P 500 Member Trend Strength

    As shown below, the long-term outlook for the S&P 500 is clearly bullish as 88.0% of the 500 stocks in the index have bullish long-term trends, up from a reading of 84.4% two weeks ago. The market’s intermediate-term trend also remains in bullish territory at a reading of 72.2%, up more than 10 points from two weeks ago. The market’s short-term outlook actually worsened over the last two weeks and remains in bearish territory with a 22.4% reading.

    S&P 500 Trend Strength
    Trend Summary
    * Note: Numbers reflect the percentage of members with rising moving averages: 200-day moving average (or 200d MA) is used for long-term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short-term outlook.

    The most important section of the table below is the 200d SMA column which sheds light on the market’s long-term health. As seen in the far right columns, you have 88% of stocks in the S&P 500 with rising 200d SMAs and 77.2% of stocks above their 200d SMA. Also, nine out of ten sectors are in long-term bullish territory with more than 60% of their members having rising 200d SMAs, with the weakest sector being the telecommunication sector at 50%.

    Trend Table
    Source: Bloomberg

    Market Momentum

    The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 500’s momentum on a daily, weekly, and monthly basis. The big change for the week was the daily MACD buy signal that was registered today and suggests the market’s correction may be over, with only the weekly category yet to give confirmation.

    MACD signals
    Source: Bloomberg

    Digging into the details for the 500 stocks within the S&P 500 we can see that the daily momentum for the market has significantly improved with a 15% jump in buy signals from 08/23/2013 to the current reading of 47%.

    The intermediate momentum of the market though eroded as the percent of members on weekly MACD buy signals has fallen from 61% on August 2nd to 28% this week.

    The market’s long-term momentum remains solid at a strong 78% this week, though it has softened a little from the 86% reading seen on July 12th.

    MACD Table
    Source: Bloomberg

    Looking at the percentage of S&P 500 members with weekly MACD buy signals is useful for gauging intermediate bottoms with most intermediate lows occurring with 30% or less members on weekly MACD buy signals. At a current reading of 28% we are more oversold than we were at the June 2013 or November 2012 lows, though not quite as oversold as the June 2012 lows. What is important to note though is the market’s longer-term momentum at its current reading of 78% shows a stronger market than present at the prior lows.

    MACD Chart
    Source: Bloomberg

    52-Week Highs and Lows Data

    The current market leaders are energy, consumer discretionary, and health care, as these three sectors have the highest percentage of new 52-week highs and very few if any new 52-week lows.

    52Week Table

    What is encouraging about the market’s condition is that, though 52-week highs diverged with the recent price of the S&P 500 and warned of a deteriorating market in the short-term, 52-week highs continue to dominate 52-week lows as the bulls continue to control the market and at no time did new 52-week lows exceed new 52-week highs during this decline. Think about that, even when the overall market was in an intermediate-term decline, below the surface you still had more of the 500 stocks in the S&P 500 hitting 52-week highs than lows, which is obviously a bullish point not to lose sight of.

    52Week Chart

    Market Indicator Summary

    Below is a multi-indicator chart of the S&P 500 that measures breadth and momentum. The two key portions I want readers to focus on is the second to last and very bottom panels. Readings at or below 30% for members with MACD lines above a baseline of zero often mark intermediate lows for the market (see green circles in MACD panel and top panel of S&P 500). After we reach intermediate-term oversold conditions we then need to see a surge of buyers come into the market to suggest a correction is over and a bottom is in. This can be measured by looking at the percentage of S&P 500 stocks that have seen a daily MACD buy signal over the prior ten days (very bottom panel). Readings north of 15% often mark the demarcation line for achieving “escape velocity” in which enough buying power has come in to overwhelm the bears and a new upleg has begun.

    Indicator
    Source: Bloomberg

    As seen above, at the current reading of 18.2% we have achieved escape velocity for the S&P 500 (as well as the Russell 2000 and NASDAQ, not shown), which means the decline from early August may be over.

    Summary

    While we have achieved escape velocity there still remains some very big market-moving events that can change the character of the market on a dime, such as a possible Syria strike, FOMC September 17-18th meeting, Fed Chairman nomination, and debt ceiling debate. That said, given the market’s long-term momentum and trend remain positive, the risk of a bear market at this point seems remote.

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    Image: Flickr (licence attibution)

    About The Author – Chris Puplava, Financial Sense Online

    Chris graduated magna cum laude with a B.S. in Biochemistry from California Polytechnic State University, San Luis Obispo. He joined PFS Group in 2005 and is currently pursuing the designation of Chartered Financial Analyst. His professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam. He manages PFS Group’s Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account. Chris also contributes articles and Market Observations to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava’s clients only—with other members of the trading staff. Chris enjoys the outdoors.

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